• The FOMC is expected to deliver a hawkish hold; Chair Powell’s post-meeting press conference will be key; the Fed may confirm plans to begin slowing QT; data highlight will be ADP private sector jobs estimate; April ISM manufacturing PMI and March JOLTS data will also be important; Canada reports April manufacturing PMI
  
• The recovery the in U.K. housing market activity is stalling
  
• USD/JPY has retraced most of the move lower from BOJ intervention; New Zealand reported soft Q1 labor market data; RBNZ released its semi-annual Financial Stability Report; Korea reported April trade data

The dollar is firm ahead of the FOMC decision. DXY is trading higher near 106.328, with markets fairly quiet due to the May Day holiday across much of Europe and Asia. The euro is trading flat near $1.0670 while sterling is trading lower near $1.2485. USD/JPY continues to creep higher and has retraced most of the post-intervention drop as monetary policy divergences continue to favor the dollar. Break above 158 sets up a test of this week’s cycle high near 160.15. The FOMC should deliver a hawkish hold today, while the ongoing backdrop of persistent inflation and robust growth in the U.S. should keep upward pressure on U.S. yields, which in turn should be supportive of the dollar. We believe that while market easing expectations have adjusted violently this past month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

The two-day FOMC ends this afternoon with expectations of a hawkish hold. The tone of the policy statement should be hawkish. In March, the FOMC noted that “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.” We think the Fed will have to acknowledge the recent deterioration in the inflation outlook. There are no updated macroeconomic projections until the June meeting, but if Fed officials were asked for updated projections today, we have no doubt that we would see a very hawkish shift in the Dot Plots across the forecast horizon.

Chair Powell’s post-meeting press conference will be key. Recall that at his March 20 press conference, Powell said it was appropriate to begin easing “at some point this year” and then later downplayed the January and February inflation data. Today, Powell will have to maintain a much more hawkish tone. Before the media blackout, virtually all key Fed officials (including Powell) signaled patience before easing. A couple of officials even floated the possibility of tightening, though we do not expect Powell to mention hikes today. While the bar for a hawkish surprise is high, dropping the guidance for easing “at some point this year” is possible and would certainly roil markets.

Fed easing expectations have been pushed out even further. Odds of a June cut have fallen to below 10%, while July odds have fallen below 25% and September odds have fallen below 55%. Even a November cut is no longer fully priced in, with odds now below 75%.

The Fed may confirm plans to begin slowing the pace of its balance sheet runoff in June. Earlier this month, the New York Fed came up with two scenarios for ending QT. The current pace of QT via balance sheet runoff is $95 bln per month ($60 bln in UST and $35 bln in MBS). Under the “lower reserves” scenario, QT would slow in H1 2025 and end mid-2025, with bank reserves falling to around $2.5 trln by mid-2026 and the balance sheet falling to $6.0 trln. Under the “higher reserves” scenario, QT would slow in H1 2024 and end early 2025 with bank reserves falling to around $3.0 trln by early 2026 and the balance sheet falling to $6.5 trln. Slowing down the pace of balance sheet reduction reduces the probability that money markets experience undue stress and has no implications for the stance of monetary policy.

Yields continue to rise. The 2-year yield is trading at 5.03% and remains on track to test the October high near 5.26%, while the 10-year yield is trading near 4.69% and remains on track to test the October high near 5.02%. We expect yields to continue rising on a hawkish Fed and robust U.S. data, thereby supporting further dollar gains.

Yesterday’s mixed batch of data will feed into stagflation fears. Q1 ECI ran hot at 1.2% q/q vs. 1.0% expected and 0.9% in Q4, while Chicago PMI fell to 37.9 (lowest since November 2022) and Conference Board consumer confidence fell to 97.0 (lowest since July 2022). Yet we are far from the sort of stagflation risks we saw back in the 1970s. We still believe that the labor market holds the key to continued U.S. economic outperformance, and so this Friday's jobs report will be very important, to state the obvious.

Data highlight will be ADP private sector jobs estimate. It is expected at 180k vs. 184k in March. Of note, NFP has outperformed ADP for eight straight months. For NFP, Bloomberg consensus sees 240k jobs added vs. 303k in March, while its whisper number stands at 236k. The unemployment rate is expected to remain steady at 3.8%. The pace of wage growth, a key driver of core services CPI inflation, will also draw plenty of attention. Average hourly earnings are expected to slow a tick to 4.0% y/y.

April ISM manufacturing PMI will also be important. Headline is expected to fall three ticks to 50.0. Prices paid is expected at 55.4 vs. 55.8 in March, new orders are expected at 51.0 vs. 51.4 in March, and employment is expected at 48.2 vs. 47.4 in March. Of note, the S&P Global manufacturing PMI dipped to a four-month low of 49.9 in April vs. 51.9 in March. Yesterday, Chicago PMI came in at 37.9 vs. 45.0 expected and 41.4 in March and was the lowest since November 2022. ISM services PMI will be reported Friday and headline is expected at 52.0 vs. 51.4 in March.

The U.S. growth outlook remains solid. The Atlanta Fed GDPNow model released its initial Q2 estimate at 3.9% SAAR and will be updated today after the data. Besides the April ISM manufacturing PMI, March construction and April vehicle sales will also be reported. These early reads are often revised significantly in both directions, but this estimate suggests momentum remains fairly strong. The New York Fed GDP nowcast model sees Q2 growth at 2.7% SAAR and will be updated Friday. Its initial estimate for Q3 will come in early June.

March JOLTS job openings will also be of interest. Openings are expected at 8.690 mln vs. 8.756 mln in February. Of note, the seasonally adjusted openings rate has been stuck at 5.3% for three months and remains well above the 4.5% level that typically signals a rising unemployment rate.

Canada reports April PMI readings this week. S&P Global reports its manufacturing PMI today, followed by services and composite PMIs Friday. Yesterday, February GDP came in weaker than expected at 0.2% m/m and 0.8% y/y.

EUROPE/MIDDLE EAST/AFRICA

The recovery the in U.K. housing market activity is stalling. Nationwide house prices came in at -0.4% m/m in April vs. 0.1% expected and -0.2% in March. As a result, the y/y slowed sharply to 0.6% vs. 1.6% in March. Encouragingly, indicators of future borrowing points to firmer house prices. For instance, U.K. net mortgage approvals for house purchases rose 61.3k in March, the highest since September 2022.

ASIA

USD/JPY has retraced most of the move lower on BOJ intervention. It is trading above the 50% retracement objective near 157.35 and is coming up on the 62% objective near 158. Break above would set up a test of the pre-intervention high near 160.15. While it may take some time for the market to get up the nerve to test the BOJ again, we think it's going to happen. Until something changes for the Fed (it gets more dovish) or the BOJ (it gets more hawkish), the policy divergences remain in place. We can't really say the BOJ intervention has been a failure, however. Even if it just introduces more two-way risk in the FX market, that's something successful right there as the market was getting too one-sided before.

New Zealand reported soft Q1 labor market data. Employment came in at -0.2% q/q vs. 0.3% expected and 0.4% in Q4 and was the first contraction since Q2 2022. The unemployment rate came in a tick higher than expected at 4.3% vs. 4.0% in Q4 and was the highest since Q4 2020. Finally, private wages came in as expected at 0.8% q/q vs. 1.0% in Q4 and was in line with RBNZ forecasts. Overall, labor market pressures are gradually easing but not by enough to force a dovish RBNZ pivot anytime soon. The market is pricing in just one rate cut this year in November.

The Reserve Bank of New Zealand released its semi-annual Financial Stability Report. The bank noted that “Global inflation is declining from elevated levels and financial markets have priced in lower policy rates over the next year. However, there remains a risk that new or persistent inflation pressures could mean global interest rates remain restrictive for longer, placing continued pressure on households, businesses and the financial system.” The bank added that “An abrupt reversal in sentiment arising from weaker-than-expected earnings or inflation remaining elevated could drag stock prices down, which would generate economic and financial risks from a market-driven tightening in financial conditions.” Lastly, the RBNZ said New Zealand’s financial system remains well equipped to handle a range of severe outcomes, noting that bank capital ratios have risen, and liquidity positions remain strong,

Korea reported April trade data. Exports came in at 13.8% y/y vs. 15.0% expected and 3.1% in March, while imports came in at 5.4% y/y vs. 6.8% expected and -12.3% in March. Of note, exports to China rose 9.9% y/y, while exports to the U.S. rose 24.3% y/y. The recovery in regional trade and activity continues, though much of it is due to low base effects.